Stagflation is a term used to describe a period with high inflation and high unemployment. This can lead to a decrease in purchasing power and economic growth. There are a few different theories on what causes stagflation, but no one is sure. Some say that it is due to a decrease in aggregate demand, while others say an increase in costs causes it. We know that stagflation can be a very difficult time for an economy. In this post, we’ll explore the different theories on what causes stagflation and try to conclude.
What is the best investment during Stagflation?
Investing during Stagflation can be considered high risk. It is essential to carefully analyze the economic environment before investment, as some may fare better than others. Some businesses will thrive when the economic climate in a country begins to stall, and inflation is soaring. Your finances must be invested in diverse sectors. You may need to take time to reexamine your portfolio and pull out of some investments until Stagflation ends.
Best Assets for Stagflation Investing:
Real Estate is a market that is heavily protected. Investments made in this sector often do not lose value as quickly. The housing market has a low correlation with the stock market. People will always need accommodation regardless of the economic situation in the country. The rental prices charged by landlords are often pegged in line with current inflation rates. For consumers paying a mortgage, you can get a fixed rate that doesn’t change with inflation. These protocols make the Real Estate market safe to invest in during a period of economic downturn.
When the consumer market has an undervalued stock, it is said to be a Value Stock. Given the tight budgets of citizens facing Stagflation, those with extra funds can afford to capitalize on the bargain buys. During Stagflation, it is likely that stock prices will fall. Buying during this period could see your stocks rise in value when the economy starts working again. It is essential to be vigilant against value traps. Some stores may appear underpriced; however, that is their actual value even in a well-performing economy.
Gold has historically been used as a way of securing currency against inflation. The gold standard was set to hedge minerals against inflation. Gold is the best option because it has a value that often increases even as the value of other currencies drops. The choice is safe to store capital; however, it may not generate significant profit. Investors often use this asset to help offset the stock market risk when the economy is experiencing Stagflation.
The raw materials used in primary and secondary production form the major supply chain for an economy. Supply shocks are one of the leading causes of Stagflation. Local suppliers can solve this problem by providing agriculture and oil commodities, in particular. The sectors mainly need investment. These types of assets are valued with demand and have the potential to outperform stocks and bonds.
Cryptocurrency is a digital currency that is expanding rapidly across the world. The asset is highly volatile but with infinite room to grow. During a period of Stagflation, it can offer you a mixed bag of risk and reward. The advantage to buying Cryptocurrency is that it can store value in the long term. Stagflation usually lasts about ten years, making it an excellent way to keep your money safe from inflation.
What happens to real Estate during Stagflation?
More Expensive Homes
As inflation soars during Stagflation, construction costs will rise in tandem. This problem means the average cost of a home will become more expensive to purchase or rent. The ripple effect of inflation is often felt everywhere. When the prices of homes go up, commodity prices will likely begin to rise. Paying the cost of energy, food, and building materials is felt in the high cost of buying a home. New construction is one aspect but even currently existing homes will cost more to rent or purchase. Due to inflation, most consumers will be unwilling to accept cash because of its volatility. A weakening buying power means consumers must flood the seller to convince them to sell. Real Estate is a low-risk investment that is likely to appreciate even during Stagflation. The Personal Consumption Index during Stagflation can show that increases in individual goods may or may not be increasing at the rate of inflation in the economy.
The housing market is constantly growing, and prices will rise during Stagflation due to consumers not selling their homes. The few houses on the market will see ordinary consumers face off against well-funded rental companies. You can therefore expect real estate affordability issues to increase during Stagflation.
No Downsizing or Upsizing
Consumers will be tied to financially draining mortgages that prevent them from upsizing or downsizing. When you have a fixed-rate mortgage that offers minimal interest payments, it won’t make sense to open another during high inflation. Setting up a fixed-rate mortgage during Stagflation will mean you remain to pay high rates when the economy returns to normal. This problem results in families not moving from starter homes to larger homes. Renovations have become more popular than buying a bigger house.
First-time homebuyers often suffer the most during Stagflation. These consumers often do not have enough leverage to outbid the well-funded buyers on the housing market. Having already bought a home means you have collateral damage to put up for a second home loan. This problem makes first-time buyers rapidly priced out of the market. When the economy is in Stagflation, wage increases cannot keep up with inflation. This feature leads to a continuous decline in housing affordability for most consumers.
How do you get out of Stagflation?
- Monetary Policy
The Federal Reserve will need to reduce the money supply in the economy. The reserve will do so by raising interest rates, therefore, discouraging spending in the economy.
- Reduce Supply Shocks
Supply shocks to crucial economic products like oil can lead to high inflation. Countries with alternative methods available can prevent supply shocks from affecting the economy.
How long did Stagflation last in the 70s?
Stagflation in the 1970s lasted almost 15 years until the mid-1980s.
When did Stagflation occur in the US?
From the late 1960s to the mid-1980s.
While stagflation can be a difficult economic period, some steps can be taken to mitigate its effects. Monetary policy and reducing supply shocks are two ways to help ease the burden of stagflation on consumers and businesses. Understanding what causes stagflation can also help individuals make better decisions about their finances and investments.